Stock Market Rumors and Credibility

Abstract

Abstract Stock prices occasionally move in response to unverified rumors. I propose a cheap talk model in which a rumormonger’s incentives to tell the truth depend on the interaction between her investment horizon and the information acquisition decisions of message-receiving investors. The model’s key prediction is that short investment horizons can facilitate credible information sharing between investors, thereby accelerating the information capitalization into market prices. Analyzing a data set of takeover rumors covered by U.S. newspapers, I find suggestive evidence in support of this prediction. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.